Macro & Micro Economics Essay Example | Topics and Well Written Essays - 2000 words

Macro & Micro Economics - try on ExampleThis causes the rate of entertain to fall or rise respectively. On the other hand the pecuniary policies alter the nub demand in the economy through the increase or decrease of political science purchase components and the after tax income share of the GDY which is held by the private sector. The following diagrams would portray a in writing(p) analysis of some of the policy measures that are undertaken and their impacts in the economy (Ashby, 2011, Expansionary policies). In the above diagram the everyday equilibrium exists at the demonstrate if intersection of GDP, ASF and APE. Monetary policies would shift the ASF line to the decently. However, it is seen from the diagram that this point cannot be reached as it is impossible for the economy to reach that point. This would consequently require a negative rate of interest but the interest rate cannot fall below zero. This shows that monetary policies independently cannot allow the econ omy to pick up the castinger GDP. This requires the need for fiscal policies in the economy (Ashby, 2011, Inconsistency Problem). Fiscal policies in the form of government purchases and tax cuts would be able to move the APE line to the right far bountiful so that the IS curve would be able to intersect the GDP line at a point of low interest level which would be attainable. Thus the monetary policy would shift the ASF line towards the right and this would pass through the point which is now attainable. To summarize it, monetary policy can be efficient only with the assistance of fiscal policies in order to help the economy recover from the takes of recession. The characterization also reflects the potential problems related with monetary policies. The faint response of APE after changes in the rank of interest coupled with the low level of interest makes it unable to fall nice to provide enough impetus to the APE to revert back to the original level (Ashby, 2011, Some Fisca l Policy is mandatory). A major problem associated with monetary policies can be explained in terms of the liquidity traps. This is a situation in which the economy enters into a severe depression which dramatic fall in prices, reduction in profits, businesses making losses which causes them to draw back from making investments in new projects. However, the problem is credibly to arise only at extreme situations. Another concern associated with the economy is the crowding out effect which arises out of expansionary fiscal policies which increases aggregate demand, APE significantly without a corresponding rise in aggregate demand or APE. The main concern about the phenomenon is that the resulting loss of funds causes a rise in interest levels and this consequently crowds out the rise in APE. According to the views of Ricardo (1772 - 1823), fiscal policies also result in budget deficit in the government that is financed by treasury borrowing. Ricardo has put forth the fact that the tax payers would be able to recognize the fact the government will be required to redeem the bonds at the time of maturity and would then levy taxes to compensate for the principle amount of the outstanding debt and also either amount of accrued interest. A number of restrictive policies can be undertaken in order to oblige inflation arising out of expansionary fiscal policies. Short term measures would include the intervention of government and implementing direct require over wages, prices, rather than the implementation of restrictive fiscal and monetary policies.